Understanding Trusts: Trusts Use In Inheritance Tax & Asset Protection Planning
Wednesday 18 March, 2026
Putting assets into a trust is a long-established way of structuring how wealth is managed and passed on. Trusts can help provide for children, support vulnerable family members and, in some circumstances, form part of Inheritance Tax (IHT) Planning.
However, trusts do not automatically reduce inheritance tax and they are not suitable in every situation. Different trust types have different tax consequences, reporting obligations and administrative responsibilities. In some cases, using a trust can increase complexity and ongoing costs.
Howard Goodship, Financial Adviser, Ringwood said:
“Here I explain the main trust types used in the UK, how they are taxed under current HMRC rules, and the practical considerations involved. This article is designed to help you decide whether you should seek personalised independent financial advice when considering or reviewing trusts.”
What is a Trust?
A trust is a legal arrangement in which a person (the settlor) transfers assets to trustees, who hold and manage those assets for the benefit of one or more beneficiaries.
Trustees are legally responsible for acting in accordance with the trust deed and relevant law. Their duties include managing investments prudently, keeping accurate records, meeting tax reporting obligations and acting in the beneficiaries’ best interests.
People use trusts for a range of reasons, including:
- Providing for children or grandchildren
- Giving income to a surviving spouse while preserving capital for others
- Supporting vulnerable beneficiaries
- Structuring family wealth across generations
- Planning for inheritance tax exposure
A trust can offer more control than making an outright gift, as it allows the settlor to set conditions on how and when assets are used.
Howard Goodship, Financial Adviser, Ringwood said:
“Trusts can be a valuable part of estate planning, but they’re not a universal solution. The right structure depends on your wider financial position, your family circumstances and your long-term objectives”.
“Our role is to help clients understand the practical implications including tax, reporting and trustee responsibilities, before making any decision. When appropriate, we work closely with solicitors and tax specialists to ensure everything is set up properly and fits within a well-considered financial plan.”
The Main Types of Trust
Below are the most commonly encountered trust structures in UK estate planning.
Bare Trusts (also known as Absolute Trusts)
A bare trust holds assets for a named beneficiary who has an immediate and absolute right to both income and capital. If the beneficiary is an adult, they can demand the assets at any time. Bare trusts are often used to hold assets for children until they reach adulthood.
For tax purposes, the assets are treated as belonging to the beneficiary. This means income tax and capital gains tax are generally assessed on them, with parental settlement rules the main exception.
Bare trusts are simple in structure, but they offer no flexibility once established. Once the beneficiary becomes absolutely entitled, the settlor cannot change the arrangement.
Interest in Possession Trusts (Life Interest Trusts)
An interest in possession (IIP) trust gives a beneficiary the right to income from the trust, or the right to use trust property (such as living in a house), for a specified period, often their lifetime. The capital then passes to other beneficiaries.
Since 22 March 2006, the inheritance tax treatment of IIP trusts depends on how and when they are created. Only certain types of post-death IIP trusts, such as Immediate Post-Death Interests (IPDI), retain specific IHT treatment. Most lifetime IIP trusts created after this date fall within the relevant property regime for inheritance tax.
This distinction is important and requires careful advice before implementation.
Discretionary Trusts
In a discretionary trust, trustees decide how and when income or capital is distributed among a class of beneficiaries. Beneficiaries do not have an automatic entitlement.
Discretionary trusts offer flexibility, which can be useful where family circumstances may change.
They are often used for asset protection or where beneficiaries may be financially inexperienced or vulnerable.
However, most discretionary trusts fall within the relevant property regime for inheritance tax, meaning they may be subject to periodic and exit charges. They also involve more complex administration and reporting.
Accumulation Trusts and Other Variations
Historically, accumulation trusts were structured to allow income to be retained and reinvested. Under modern tax rules, most accumulation trusts are treated in the same way as discretionary trusts for inheritance tax purposes.
There are also specialist trusts, including disabled person’s trusts, settlor-interested trusts and non-resident trusts. Each has specific tax and legal consequences, and tailored drafting is essential.
How Trusts Are Taxed for Inheritance Tax
Most trusts (excluding absolute trusts and vulnerable person’s trusts) created since 22 March 2006 fall under the relevant property regime.
This means inheritance tax can apply at different stages:
Entry Charges
When assets are transferred into certain types of trust during lifetime, this is usually treated as a Chargeable Lifetime Transfer (CLT). If the value transferred exceeds the available nil rate band, a lifetime IHT charge (currently 20% on the excess if paid by the trustees) may apply.
Ten-Year Periodic Charges
On each tenth anniversary of the trust’s creation, trustees may face a periodic IHT charge based on the value of trust assets at that time.
Exit Charges
When capital leaves the trust between ten-year anniversaries, an exit charge may apply.
The calculation of these charges depends on several factors, including the value transferred, previous gifts, available nil rate band and trust history.
Trusts are not a guaranteed method of avoiding inheritance tax, and in some cases may create additional tax complexity.
Income Tax and Capital Gains Tax
Trustees may also be liable for income tax and capital gains tax at rates that can differ from personal tax rates. Discretionary trusts, in particular, are subject to specific trust tax rates.
These ongoing tax obligations are an important part of deciding whether a trust structure is appropriate.
Trust Registration and Reporting Obligations
Under current anti-money laundering regulations, most UK express trusts must register with HMRC’s Trust Registration Service (TRS), even if they do not have a tax liability. There are limited exclusions.
Trustees may also need to:
- Submit trust tax returns
- Report chargeable lifetime transfers
- Report ten-year periodic charges
- Report exit charges
- Maintain up-to-date beneficial ownership records
Failure to comply with registration and reporting requirements can result in penalties. Trustees must understand and be prepared for these responsibilities.
Advantages and Disadvantages in Practice
Potential Advantages
- Structured control over how assets are used
- Flexibility (in discretionary arrangements)
- Provision for vulnerable beneficiaries
- Possible IHT planning benefits in suitable cases
Potential Disadvantages
- Possible entry, periodic and exit IHT charges
- Higher income tax rates within certain trusts
- Ongoing administration and compliance costs
- Trustee responsibilities and potential personal liability
- Complexity compared to outright gifting
Trusts should be viewed as legal planning tools, not investment products. Whether they are appropriate depends entirely on personal circumstances and objectives.
Key Questions Before Setting Up a Trust
- What is the primary objective, control, protection, tax planning or family provision?
- Are you prepared for ongoing tax and reporting obligations?
- Have you considered alternative estate planning options?
- Who will act as trustees, and do they understand their duties?
- Do the potential benefits outweigh the costs and complexity?
Understanding these factors is essential before proceeding.
Regulatory Considerations
When communicating about trusts and estate planning, firms authorised by the Financial Conduct Authority must ensure communications are fair, clear and not misleading.
Tax treatment depends on individual circumstances and current legislation, which may change in the future. Trusts do not automatically reduce inheritance tax, and outcomes are not guaranteed.
Lonsdale provides regulated financial planning advice within its permissions. Legal drafting of trust documents is carried out by qualified solicitors. Any recommendation will consider your full financial position, objectives and risk profile.
Before making a decision, you should ensure you understand the costs, tax implications, risks and administrative responsibilities involved.
Where Lonsdale Can Help
If you would like to explore whether a trust may be suitable for your circumstances, Lonsdale’s financial advisers can assess your wider financial position and, where appropriate, work alongside solicitors and tax specialists to ensure any structure is properly established and maintained.
A personal recommendation will take into account your objectives, estate size, tax position and long-term plans.
Important Note: This article is provided for general information only and does not constitute personal financial, tax or legal advice. The taxation of trusts depends on individual circumstances and current legislation, which may change. For advice tailored to your situation, please speak to a qualified financial adviser authorised by the Financial Conduct Authority. The Financial Conduct Authority does not regulate advice on Estate Planning or Tax Planning.
Sources:
https://www.gov.uk/guidance/trusts-and-inheritance-tax
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual
https://www.gov.uk/government/publications/hm-revenue-and-customs-trusts-and-estates-newsletters/hmrc-trusts-and-estates-newsletter-february-2026
